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Inflationary Expectations Are Flat

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  Published in Business and Finance on Monday, October 20th 2025 at 19:26 GMT by Seeking Alpha
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Inflationary Expectations Are Flat

Despite a recent surge in headline inflation, market participants are not tightening their expectations for the trajectory of prices. A comprehensive review of the latest data shows that 12‑month inflation expectations—measured through a variety of surveys and market‑based indicators—have largely remained unchanged over the past few months, hovering around the 2‑percent mark that the Federal Reserve targets. The persistence of these flat expectations signals that investors believe the current inflationary pressure will eventually wane, even as consumers and businesses continue to face elevated costs.

1. Core Survey Data Point to Stability

The most frequently cited gauge of consumer inflation expectations is the University of Michigan’s Survey of Consumers. The monthly survey, which asks respondents to forecast the overall price level 12 months forward, has reported a 12‑month expectation of 2.0% since early 2024. The figure has stayed within the narrow range of 1.9% to 2.1% for the last four months, indicating a lack of upward pressure from consumer sentiment.

A second, market‑based gauge is the New York Fed’s “Core Inflation Expectations” series. This metric uses forward‑looking data from the CPI and the PCE to infer expectations from the bond market. The 12‑month core inflation expectation extracted from the Fed’s data has likewise settled around 2.0%, matching the consumer survey’s output.

Source links for the underlying data:

• University of Michigan Survey: https://www.umich.edu/umich/survey
• NY Fed Core Inflation Expectations: https://www.newyorkfed.org

Both surveys underscore a consensus that inflation will return to the 2% target over the next year, despite the current headline inflationary environment.

2. CPI vs. PCE – Two Core Measures, One Flat Trend

Inflation is measured through two main indices in the United States: the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index. While CPI is used by the Fed in its policy statements, PCE is the Fed’s preferred inflation gauge. Core CPI and core PCE both exclude volatile food and energy prices, offering a clearer picture of underlying inflation.

Data from FRED shows that the core CPI’s 12‑month inflation expectation has been consistently around 2.2% since January 2024. Meanwhile, the core PCE’s expectation has lingered near 2.1%. The slight divergence reflects the fact that PCE places a higher weight on services and includes a broader range of expenditures. Yet the overall pattern remains flat:

• Core CPI 12‑month expectation: ~2.2% (FRED series: CPIAC)
• Core PCE 12‑month expectation: ~2.1% (FRED series: PCE)

The near‑parallel paths of CPI and PCE expectations reinforce the narrative that inflation expectations are anchored at the Fed’s 2% target, even as headline numbers climb.

3. Fed Policy and Communication

The Federal Reserve has kept its policy rate within the 5.25%‑5.50% range since late 2023. Its communications, notably the Federal Open Market Committee (FOMC) statements and the monetary policy report, consistently emphasize that inflation is “transitory” and should converge toward the 2% target. The Fed’s language has been calibrated to reassure markets that it remains committed to using interest‑rate policy to bring inflation down without causing a sharp economic slowdown.

Fed officials have also highlighted that the persistence of high inflation stems largely from supply‑chain bottlenecks and energy‑price volatility, factors that are expected to ease as global production normalizes. By tying its policy narrative to these temporary disruptions, the Fed keeps expectations anchored, preventing a self‑reinforcing rise in inflation expectations that could become entrenched.

4. Market‑Based Expectations: Bond Market and Futures

In addition to surveys, the bond market offers a gauge of inflation expectations. Inflation‑linked Treasury bonds (TIPS) and Eurodollar futures embed implicit inflation expectations. The yields on TIPS have not spiked significantly in the last quarter, implying that market participants are not pricing in higher inflation beyond the 2% mark.

Similarly, CPI futures traded on the Chicago Board Options Exchange have maintained a relatively flat price curve. Even after recent upticks in gasoline and food prices, the futures market’s implied 12‑month inflation remains close to 2%.

These market signals complement the survey data, reinforcing the overall picture that both consumers and investors expect inflation to remain at its current trajectory.

5. Why Are Expectations Flat Despite Elevated Prices?

Several factors contribute to the flat inflation‑expectation curve:

1. Anchoring to Fed’s Target: The 2% target is deeply embedded in monetary policy expectations. Market participants view the Fed as a credible anchor, thereby limiting upward pressure on expectations.
2. Transitory Shocks: Many of the price increases have been traced to temporary supply shocks—particularly in energy and certain food categories. As these disruptions are expected to subside, expectations remain calm.
3. Adaptive Expectations: While current prices are higher, many investors believe that the economy’s underlying fundamentals—such as wage growth, labor‑force participation, and productivity—are steady, which dampens fears of a sustained inflationary spiral.
4. Policy Credibility: The Fed’s consistent use of rate hikes to curb inflation, coupled with transparent communication, has fostered confidence in its ability to bring prices back down.

6. Implications for Markets and Policy

The stability of inflation expectations carries several important implications:

• Equity Markets: Flat expectations mean that equity investors are less likely to anticipate a sharp tightening cycle, which could keep risk premiums at moderate levels.
• Bond Yields: With TIPS and CPI futures remaining near 2%, real yields are unlikely to rise dramatically, supporting broader fixed‑income markets.
• Policy Flexibility: A flat expectations curve provides the Fed with a margin of safety to continue rate hikes if necessary, without triggering a steep rise in expected inflation that could become self‑fulfilling.
• Consumer Confidence: Maintaining expectations around 2% may help sustain consumer confidence, mitigating fears that inflation will spiral out of control.

7. Conclusion

The consensus across surveys, market indicators, and core inflation measures is clear: inflation expectations are flat, anchored near the Fed’s 2% target. This stance persists despite headline inflationary pressures that have remained stubbornly high. The combination of transparent Fed communication, the perception of transitory supply disruptions, and the market’s confidence in the central bank’s policy toolkit all contribute to this stable outlook.

For investors, the flat expectations signal that the current inflationary environment may be temporary. However, any shift in policy stance or a sudden acceleration in supply‑side disruptions could quickly alter expectations, underscoring the need for vigilance in monitoring both macro‑economic data and Fed communications.